Financial market research and analysis

The IMF decided to include the Chinese Yuan in the SDR yesterday. Yuan will be part of the world’s reserve currency basket from October 1st 2016, with 10.92% weighting. The yuan has gained as the PBoC is now expected to reduce intervention and let the market decide on the yuan’s value. PBOC Vice Gov Yi Gang said ‘there is no basis for yuan to continue to devalue, the inclusion in the SDR should make yuan more stable and facilitate cross border investment, yet the PBoC will still intervene on abnormal volatility, stable interest rates desired’ (Reuters).

In Japan, the nation’s biggest pension fund GPIF announced a largest ever loss of Y 7.9 trillion in 3Q. The poor performance revived speculation that the GPIF would start hedging against the currency risk and weighed on some JPY-crosses in Tokyo. The yen strengthened against all of its major peers and remained flat against the US dollar.
The 3.6 trillion yen loss in foreign shares is mostly due to the rout in global equity markets led by China in August. Hardly, any currency hedging would have significantly reversed the hit taken on the stock sell-off. And indeed, the yen is at multi-year levels against its major peers since June, which suggests that the GPIF performance would have not been significantly better if hedged. This is why, the speculation of a currency hedge backed by the yen, does not seem to be a performance booster unless the yen tops at 125/130. Above this zone, the solvability issues could be brought back on the table, hence require a cautious action from the GPIF.


RBA keeps the additional rate cut joker in hand as the Aussie appreciates

As expected, the RBA maintained its cash rate target unchanged at 2.00%. The Aussie was pushed above the top of its monthly downtrend channel (0.7225) and is presently testing the 0.7280/0.7300 resistance.

The inaction from the RBA revived the carry inflows as the rate differential remains very much advantageous in the current flat rate environment. Nevertheless, the RBA will certainly feel uncomfortable should the Aussie appreciate too much while the commodity markets continue their journey to the south. Therefore, the upside should remain capped as investors bear in mind that the macroeconomic conditions in Australia give flexibility for additional rate cut in the foreseeable future. The mid-term critical resistance remains at 0.7380, a major Fibonacci 38.2% retracement on May – September decline. Below 0.7380, the wider bias remains negative and we see opportunity in selling the rallies targeting 0.70 cent.